IMF Approves Emergency Assistance for Honduras

The International Monetary Fund (IMF) today approved Honduras’ request for emergency financial assistance related to natural disasters. The assistance, equivalent to SDR 47.5 million (about US$66 million), will support the government’s economic recovery program and associated relief and rehabilitation efforts in the aftermath of Hurricane Mitch.

On the eve of Hurricane Mitch, prospects for the Honduran economy were good, based on progress over the past two years in achieving faster real GDP growth, lowering inflation, and reducing fiscal imbalances. Private sector confidence was on the upswing based on these achievements, on advances in the area of privatization and reforms in the tax system and the financial sector. Also contributing to the upswing were indications that the government was close to agreeing on a new program of stabilization and broad-based reforms supported under the Enhanced Structural Adjustment Facility (ESAF)1 that would also facilitate additional concessional loans from the World Bank and the Inter American Development Bank (IADB), and normalize relations with creditors.

The devastation caused by the hurricane has been unprecedented in terms of losses of life, personal property, infrastructure, and the economy. Current estimates indicate that the number of deaths was close to 5,500, about 8,000 people were missing, nearly 2 million people were displaced, and several towns and villages had been destroyed. Also, several roads and bridges were made impassable, most schools, and several hospitals and administrative centers were closed, and basic public services have been devastated. First approximations by the authorities indicate losses of inventories and fixed assets--including infrastructure--amounting to about 40 percent of GDP. Real GDP is estimated to fall to 3 percent in 1998 and turn negative in 1999, compared with pre-hurricane projections of real GDP growth of about 5-6 percent a year.

The authorities’ prompt response to the crisis has focused on addressing--with substantial help from the international community--the immediate priorities of providing food, shelter, and health care to the homeless and displaced persons; taking measures to preserve public health; repairing essential infrastructure and beginning clean-up and reconstruction work. At the same time, the authorities are beginning to adopt measures aimed at limiting the effects of the disaster on inflation and interest rates, and setting the stage for economic recovery. A revised central government budget for 1999 is being formulated to take account of the changed outlook for government revenue and the new spending requirements, while every effort will be made to limit domestic financing in part by reallocating spending to emergency needs.

As soon as the immediate priorities have been addressed, the authorities are determined to resume discussions aimed at finalizing an economic program that could be supported under the ESAF and that is focused on the consolidation of macroeconomic stability, on increasing prospects for private investment, and on deepening structural reforms to address constraints to growth.

Honduras joined the IMF on December 27, 1945, and its quota2 is SDR 95.0 million (about US$133 million). Honduras’ outstanding use of IMF financing currently totals SDR 33 million (about US$45 million).

1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5½-year grace period.2 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.